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Companies' ESG scores improve countries' macroeconomic growth, report finds

Illustration with blue world map in background and three hands pointing and objects including a calculator, coins and graphs
Bakhtiar Zein

Private sector companies' environmental, social and governance (ESG) performance can improve countries' economic growth, according to landmark research published last week that contains major implications for policymakers and central banks plotting how to best resuscitate coronavirus-stricken economies.

The breakthrough report, published by the University of Oxford, reveals for the first time a significant positive correlation between average ESG scores at companies and their native countries' macroeconomic performance, with high ESG performance aligning with an improvement in GDP per capita and a reduction in unemployment.

The study, which co-author Ben Caldecott described as "an exploration of the relationship between the micro economy ­— the companies that constitute an economy, or the large part of the economy — and the macroeconomic picture," concludes that promoting good ESG practices in the private sector is an important way that policymakers can accelerate economic growth and development.

The findings carry particular weight as governments devise plans to unleash unprecedented amounts of spending to bailout companies and salvage sectors battered by the pandemic.

Our evidence of the positive relationship [between firm-level ESG scores and macroeconomic performance] can help policymakers understand the options.

Caldecott, director of the University of Oxford's Sustainable Finance Program, told BusinessGreen the report bolsters the argument from a growing number of green groups, scientists, politicians, businesses and economists that a green recovery to the coronavirus would unlock a number of economic benefits on top of benefitting the climate and wider environment.

"Policymakers need hard numbers," said Caldecott. "Our evidence of the positive relationship [between firm-level ESG scores and macroeconomic performance] can help policymakers understand the options."

The researchers looked at ESG scores of thousands of firms across 19 developed economies and 11 emerging economies over a 15-year period through to 2017 to provide their evidence base. The analysis found that increases in average social performance had a positive effect on economic growth across all countries surveyed. Meanwhile, an improvement in corporate environmental and governance performance had a positive effect in emerging economies.

More specifically, a one-unit increase in average Environmental, Social or Governance scores by companies at a country-level was associated with respective increases of 0.06 percent, 0.10 percent and 0.19 percent in the log of GDP per capita. In other words: The findings predict that if firms in Indonesia — which had the worst average ESG score of countries surveyed — matched their score with that of top performer France, this would correlate to a boost in per capita GDP from $4,300 to more than $4,900, a 15 percent gain.

This latest research complements a previous University of Oxford report, published by a team including Lord Nicholas Stern and Nobel Prize winner Joseph Stiglitz in early May, that argued that non-conditional support for high carbon industries would see a lower return on investment than green stimulus packages. Both academic interventions add momentum to calls for governments to attach specific sustainability conditions to support packages awarded in the coming months to environmentally damaging businesses and sectors.

In some quarters, governments have signaled that they are, at least in part, heeding the avalanche of calls for a green recovery. In Canada, Prime Minister Justin Trudeau's government has mandated that large companies receiving loans must disclose their environmental plans, while Air France agreed to work towards becoming the world's "most environmentally friendly" airline in order to secure its government loan package. More broadly, leaders in the United Kingdom, the European Union, New Zealand and several other countries have all committed to making climate action the key plank in their evolving economic recovery packages.

While it remains to be seen, however, whether these pledges will be delivered on at scale, last week's findings bolster the argument for governments to attach some form of conditionality — whether social or environmental — to business support packages and take active steps to encourage firms to improve their ESG performance.

There are a "variety of policy tools" at policy makers disposal that can enhance the adoption of ESG performance at companies, according to the study.

ESG loans, or loans that incentivize borrowers' commitment to ESG policy improvements, are just one vehicle policymakers could turn to in order to leverage the macroeconomic benefits associated with ESG improvements, Caldecott said.

"Sustainability-linked loans tied to improvements in E, S and G scores could be a critical part of recovery packages," he explained. "In terms of the S and creating social score-linked loans, that would create a strong financial signal for companies to think about recovery plans in a way that is supportive of broader society."

Sustainability-linked loans tied to improvements in E, S and G scores could be a critical part of recovery packages.

Caldecott added that report's findings were relevant not just to policymakers exploring how to build recovery programs to reboot economies post-COVID, but also could inform solutions that address the productivity slowdown in the U.K. that long predates the coronavirus crisis.

"The findings show that one way to address the productivity puzzle in countries like the U.K., where we have had persistently low productivity growth, is to focus on ESG performance and the adoption of ESG practices by companies," Caldecott said. "The effects are even more pronounced in emerging economies in the sample — as you might expect because they are starting from a lower base — but this is not just an emerging economy phenomenon. It speaks to key actors in all these jurisdictions."

The report's revelations have major implications for institutions working to support international development, such as multinational development bank, Caldecott added. "If you are thinking about promoting economic development in emerging economies and developing countries, improving ESG scores in the private sector is going to be an important way to do that in the long run," he explained.

While it remains to be seen whether governments will consider boosting companies' ESG performance as they seek to reboot economies, today's findings work with the more established body of research that has argued that ESG scores result in better corporate and financial performance to deliver a resounding rebuff to the tired view that sustainable corporate practices come with high costs that can undermine national economic growth.

Furthermore, and perhaps even more important, the findings showcase the critical role that a sustainability-focused private sector can play in both battling the climate crisis and driving an economic recovery from the coronavirus crisis.

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